(The following statement was released by the rating agency)
Oct 10 - =============================================================================== Summary analysis -- Sharp Corp. ----------------------------------- 10-Oct-2012 =============================================================================== CREDIT RATING: BB+/Watch Neg/B Country: Japan Primary SIC: Household appliances, nec Mult. CUSIP6: 819882 =============================================================================== Credit Rating History: Local currency Foreign currency 31-Aug-2012 BB+/B BB+/B 03-Aug-2012 BBB/A-2 BBB/A-2 03-Feb-2012 BBB+/A-2 BBB+/A-2 11-May-2011 A-/A-2 A-/A-2 =============================================================================== Rationale
The ratings on Sharp Corp. (BB+/Watch Neg/B) reflect the company's high exposure to volatile liquid-crystal display (LCD)-related business, weakening internal cash flow, less-than-adequate liquidity, and an increasingly difficult external environment for its core business due to fierce technological competition, the strong yen, and constant downward pressure on prices. Moderating factors include the company's technological strengths in electronic components.
We view Sharp's financial risk profile to be "significant." Sharp's internal cash flow has weakened, in our view, due to its weakening earnings. Sharp's first quarter (ended June 30, 2012) earnings results worsened beyond our expectations, resulting in JPY94.1 billion operating losses and JPY138.4 billion net losses. Its flat-panel TV and LCD panel businesses recorded large operating losses due to weakened sales in Japan and China, lower capacity utilization at both large and medium-to-small LCD panel facilities, and inventory adjustments. Its smartphone and mobile handset business is also suffering from a decline in sales volume due to intense competition with overseas handset makers and a shortage in supply of key components. The company also revised down its fiscal 2012 (ending March 31, 2013) full-year forecast to operating losses of JPY100 billion and net losses of JPY250 billion.
On Sept. 28, 2012, Sharp announced that it has signed a JPY360 billion syndicated loan agreement with Mizuho Corporate Bank Ltd. (A+/Negative/A-1) and Bank of Tokyo-Mitsubishi UFJ Ltd. (A+/Stable/A-1). The contract, the term of which ends June 30, 2013, consists of a JPY180 billion term loan and a JPY180 billion uncommitted line of credit. In our view, the signing of the loan agreement will not improve the company's debt profile materially, because the contract term of the agreement is short and Sharp's debt profile is likely to remain largely dependent on short-term debt. Although we believe the signing of the loan agreement confirms our assumptions to some extent that major creditor banks will continue to provide Sharp with stable financing and that the company does not face serious problems refinancing its debt, we consider that the factors we will review in resolving the CreditWatch status remain basically unchanged.
We view Sharp's business risk profile to be "satisfactory." In our view, Sharp's technological strengths in flat-panel TVs, LCD panels, and electronic devices still support its credit quality. Standard & Poor's expects Sharp's earnings and cash flow to begin to recover in the second half of fiscal 2012 because of a likely improvement in operating rates at its key Sakai and Kameyama plants. Our current ratings incorporate an assumption that Sharp will reach an agreement with Taiwan-based electronics maker Hon Hai Precision Industry Co. Ltd. (A-/Stable/--) and implement a strategic alliance, although terms and conditions of the deal remain uncertain.
Because its current liquidity needs exceed sources, we view Sharp's liquidity position as "less than adequate." Sharp's liquidity position is weakening, in our view. Internal cash flow remains weak, and financial market conditions for the company have deteriorated. As of June 30, 2012, Sharp had a high dependence on short-term borrowings. It had JPY336 billion in short-term debt and JPY362 billion in commercial paper. In recent months, the company has faced unfavorable financial market conditions, as evidenced by a recent rise in spreads on credit default swaps, which has added to its difficulty in issuing new commercial paper. Weak internal cash flow has forced the company to repay its commercial paper primarily with bank borrowings. In our view, the recent signing of the JPY360 billion loan agreement will not improve the company's debt profile materially. Still, we incorporate assumptions that major creditor banks will continue to provide Sharp with stable financing and that the company does not face serious problems refinancing its debt.
The ratings on Sharp are on CreditWatch with negative implications. In resolving the CreditWatch status, we will review the following factors: Ongoing developments regarding a strategic alliance with Hon Hai Precision and how it would benefit Sharp's business and financial risk profiles; The company's debt profile and how it can secure funding sources with longer terms beyond June 2013 to meet future debt maturities and reduce its dependence on short-term debt; and Sharp's business strategy to restore earnings in the near to medium term, and potential downside risks to earnings. We will consider lowering the ratings if Sharp's earnings in fiscal 2012 and prospects for its recovery deteriorate even further or the company's financing environment and relationships with creditor banks and strategic partners worsen. In addition, given the unfavorable financial market conditions for the company in recent months, we will examine if the recently signed JPY360 billion loan agreement is further secured with assets held by Sharp, and assess the company's priority debt ratio in considering the potential for additional lowering of the issue ratings. Specifically, the issue rating will be notched one notch down from the corporate rating if we believe the priority debt exceeds the threshold of 15% against the company's assets if the long-term rating is 'BB+' or lower. We aim to resolve the CreditWatch by the end of November 2012, or 90 days from the CreditWatch placement of Aug. 31, 2012, as we reassess the company's medium- to long-term business and alliance strategies, and refinancing plans beyond June 2013.
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